I worked in Japan for more than 12 years in the eighties and nineties, in Osaka, Nagoya and Tokyo with the U. S. State Department, Citibank and Merrill Lynch. After many more years in China in banking (Deutsche Bank and Ping An Bank) and consulting, I am back in Tokyo conducting the business of Yangtze Century Ltd. (Hong Kong/Shanghai) and producing this blog. E-mail me at smharnerco@yahoo.com.

Whither Japan Stocks: How Much Value is Left?

With the Nikkei now at a two year high, how much value is left in Japanese stocks?

Pedestrians walk in front of a stock quotation boad (L) and a currency rate quotation boad (R) flashing the Japanese yen rate against the US dollar in Tokyo on January 28, 2011. The headline Nikkei index at the Tokyo Stock Exchange lost 118.32 points to 10,360.34. (Image credit: AFP/Getty Images via @daylife)

The Nikkei 225 average closed this week at 10,913, up about 100 yen from the previous week’s close. That extra 100 yen did not come easily. Monday began with a gain of 149 yen. Tuesday added 77 yen. Wednesday witnessed a stunning drop of 278 yen. The market remained flat on Thursday. But optimism returned and delivered a 303 yen rise on Friday.

Three factors were the main market movers: the yen/dollar rate; comments of Japanese officials about the yen/dollar rate; and continuous foreign net buying. Wednesday’s drop was triggered by an unexpected reversal of what has appeared bankable—and officially promoted– weakening trend for the yen. The yen’s return to weakening, or at least holding the level of about 90 yen/dollar, buoyed the market on Friday. Also at work in Wednesday’s selloff were doubts, as I noted in my last post, that have been gathering about the wisdom and efficacy of the crude Keynsianism (dubbed “Abenomics”) that seems in store for Japan under the new Liberal Democratic/New Komeito government.

Foreigner buyers have targeted stocks expected to get an earnings boost from the cheaper yen. Fifteen stocks whose operating earnings will be boosted 25% or more over forecasts if the yen stays below 90 yen/dollar were listed in mylast post. Leading the list was Mazda (OTC: MZDAY) whose stock rose 12% on Friday. This stock has more than doubled since last October.

Another small boost to the average was the Sony’s (NYSE: SNE) spectacular 12% jump. Part of this rise is attributable to the factors noted above, but a greater part is due the announcement that the company will be selling its New York office building for $1.1 billion and will include in current fiscal year ended March 31 profit on the sale of $685 million (JPY 61.5 billion). While this is a one off transaction, it is representative of the major restructuring actions that Japan’s major companies are taking to remain competitive. Such a move is positive for investor sentiment and probably helped push higher the shares of Panasonic (NYSE: PC) which rose 5.32%.

The restructuring story remains a driver of appreciation for Hitachi Ltd. (PINK: HTHIY) which rose 4.17% to 550 yen in Tokyo, up from 404 yen in November. Under CEO Nakanishi, Hitachi has undertaken to streamline and globalize its operations. A major initiative in this direction was the decision, announced in November, to form a 35/65% joint venture with Mitsubishi Heavy Industries that will combine their thermal power systems operations, including thermal power generation, geothermal power generation, environmental equipment business, fuel battery business, and other related businesses.

At over JPY 2 trillion, the volume traded on Wednesday was the highest since the panic selling following the earthquake/tsunami/Fukushima nuclear disaster of March 11, 2011. On Friday TSE volume topped JPY 2.2 trillion. Higher volumes are like water to parched throats for brokers like Nomura Securities (NYSE: NMR). Its stock rose 2.29% on Friday to 491yen. It had languished below 300 yen for months before November 2012

So back to the question: How much value is left in Japanese stocks? As I wrote in my last post, my view is that there is much value that is either still unappreciated, or intrinsic in the business plans of companies that are restructuring, cutting costs, globalizing, and continuing to develop world-beating technologies. This is a lot Japanese companies, comprising both the “blue chips” that populate the 1st section of the Tokyo Stock Exchange and smaller companies on the 2nd board, in regional exchanges, and on the JASDAQ markets.

Statistics for the 1st section suggest that blue chips valuations are still not stretched. At the close today, 1st section TSE stocks’ price-to-book ratio was 1.12 times; PER was 22.76 times trailing and 18.34 times forecast earnings. EPS yield was 4.39% against last year’s earnings; 5.45% against current FY forecast earnings. Dividend yield is 1.9%/1.93% respectively, which is attractive compared with fixed income alternatives.

Successful investors will look at individual companies, but there is also a way to invest broadly in the Japanese economy without buying an index or ETF. It is to buy the megabanks, particularly Mitsubishi Tokyo UFJ Financial Group (NYSE: MTU). This stock closed on Friday in Tokyo at 484 yen, up 2.76%. On November 14 the price was 345 yen. MTU’s price-to-book is 0.67 times; forward PER is 9.95 times; dividend yield is 2.55% and EPS yield is 14.72%.

Banks are cyclical stocks, so we must be cautious. But I think MTU presents value. And so do many other of Japan’s restructuring and globalizing companies.

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